The Determinants of Sticky Prices and Sticky Plans: Evidence from German Business Survey Data

Abstract

So far, there is no consensus on the price adjustment determinants in the empirical literature. Analyzing a novel firm‐level business survey data set, we provide new insights on the price setting behavior of German retailers during a low inflation period. Relating the probability of both price and pricing plan adjustment to time‐ and state‐dependent variables, we find that state‐dependence is important; the macroeconomic environment as well as the firm‐specific condition significantly determines the timing of both actual price changes and pricing plan adjustments. Moreover, input cost changes are important determinants of price setting. Finally, price increases respond more strongly to cost shocks compared to price decreases.

Time-varying business volatility and the price setting of firms

“…Lein (2010) emphasizes the important role of intermediate good costs as a determinant of a firm's price setting. The ifo dataset contains no direct information about input costs, which is why we construct a variable that proxies the change in the cost of input goods for each manufacturing industry k for each time period (∆Costs k,t ) following Schenkelberg (2013). ∆Costs k,t for each industry is calculated as the weighted average of net price changes of input goods from all industries.…”

“…To compute a proxy for the cost of input goods, Costs k,t in industry k, we follow the approach outlined in Schenkelberg (2013). In this approach, a weighted price variable of all K industries that provide input goods for each production industry k is computed.…”

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

“…Thus, expansionary monetary policy is more likely to create a change in prices rather than output. Evidence of such downward stickiness could be found, for example, in Schenkelberg (2014).…”

Beyond the Business Climate: Regular and Supplementary Questions in the ifo Business Survey

“…Price setting behavior of firms was also subject of various research papers. Schenkelberg (2013) finds that the macroeconomic environment as well as the firm-specific condition significantly determines the timing of both actual price changes and pricing plan adjustments and that input cost changes are important determinants of price setting. Bachmann et al (2018) estimate from the micro data of the German ifo Business Climate Survey the impact of idiosyncratic volatility on the extensive margin of firmlevel price setting behavior.…”